The sector equity category is a bit of an oddball, but a high-performance
oddball. Consisting primarily of science/technology and health-related
funds, this 19-member group has generated the best 3-, 5- and 10-year
average annual compounded returns through the end of May (17.2%, 20.0%, and
9.4% respectively) of any fund category. And of course, some sector funds
fared much better. The
Fidelity Global Technology Fund is a case in point.

The fund has delivered consistently high returns, with its 3-, 5- and
10-year average compounded rates of return of 27.2%, 26.3%, and 11.7%
respectively to the end of May, not to mention its whopping 40.1% return
for the 12 months ending in May. And one of the keys to its success,
according to
Hyun Ho Sohn, London, England-based portfolio manager with Fidelity International, is his
strategy of looking beyond short-term trends and buying long-term industry
leaders. “One result is that the portfolio has a slight anti-momentum
bias,” he admits.

The style is consistently bottom-up with disciplined valuations; Hyun Ho
professes a preference for companies with robust balance sheets, high
levels of free cash flow, and good earnings visibility. While he does not
allocate on the basis of geography, regional and thematic exposure is
monitored, and allocations are made among growth stocks (typically 50%-60%
of the portfolio), cyclicals (under 30%) and special situations (also under
30%).

“At the moment, the portfolio favors mid- and small-caps, which have
greater expansion potential than large- and mega-cap names,” says Hyun Ho.
“Given the winner-take-all dynamic that often applies in technology, with
second- and third-place firms in a given area taking much smaller market
shares than the winner, we look for companies that have clear competitive
advantages. They may be volatile in the short term, but over a longer
investment horizon – three-plus years – their qualities should be reflected
in their valuations.”

Hyun Ho cites San Francisco, CA-based
Salesforce.com Inc. (NYSE: CRM) as an example of the desired growth profile. “It is a clear leader in the
software-as-a-service (SaaS) industry,” he says. “It is exposed to
structural growth in cloud computing, and is using its lead position in the
automation of sales-related business tasks to enter adjacent markets, such
as marketing, customer service management, and business analytics. The
company is also registering patents in the emerging field of artificial
intelligence (AI).”

Among cyclicals, Hyun Ho points to Neubiberg, Germany-based Infineon Technologies AG. “Thanks to its leading position
in power semiconductors and radar sensors – it manufactures components for
smart cars and electric vehicles – it’s poised to gain from the smart-car
revolution. It has a 17% market share versus 7% for its biggest competitor.
The process of developing fully autonomous cars will take a long time, but
it has started and demand is growing, and that will underpin revenue and
margin expansion from around 15% up to 20%.

“The technology sector is becoming far more global in nature, and less-U.S.
centric,” Hyun Ho adds. “It is becoming more diversified in terms of the
types of investable technology. It is also a far less cyclical investment
proposition than was the case 10 or 20 years ago, with software and
associated services – which benefit from steady, recurring revenue streams
– taking an ever-greater share of the market relative to more cyclical
hardware and equipment companies.”

Hyun Ho says U.S. Internet names look expensive at the moment, but there’s
good value in Asia. “We are continuing to see structural global growth in
internet usage and e-commerce, along with a significant increase in mobile
internet traffic and rising demand for digital content across multiple
platforms,” says Hyun Ho. “All of this, together with the development of
future technologies like smart cars, AI, virtual and augmented reality and
3D printing, makes for a very promising long-term investment backdrop.”

Olev Edur
is an experienced financial and business journalist and a frequent
contributor to the Fund Library.

Commissions, trailing commissions, management fees and expenses all may be
associated with mutual fund investments. Please read the simplified
prospectus before investing. Mutual funds are not guaranteed and are not
covered by the Canada Deposit Insurance Corporation or by any other
government deposit insurer. There can be no assurances that the fund will
be able to maintain its net asset value per security at a constant amount
or that the full amount of your investment in the fund will be returned to
you. Fund values change frequently and past performance may not be
repeated. No guarantee of performance is made or implied. The foregoing is
for general information purposes only. This information is not intended to
provide specific personalized advice including, without limitation,
investment, financial, legal, accounting or tax advice.